Lewisian Model and Development

Lewisian Model and Development State the assumption of the model. The Lewis Model was developed in 1954 whereby it was shown that expansion of industrial sector was crucial to the development of less-developed countries (LDCs). The model was based on following important assumptions: a) Less-developed countries have dual economy system. This means that economy in such countries is dependent on two large sectors that operate in starkly different environment. These sectors were defined as agriculture and industry.

It was assumed that while agricultural sector is the largest economic sector in LDCs, it fails to make equally significant contribution to the country's income because this sector is characterized by low income, low productivity, high unemployment and poor wages. On the other hand industrial sector operates in a capitalist environment where business is run in the same manner as in western societies. This leads to huge differences in productivity and efficiency in the two sectors.

LCDs can stand to benefit from this dual economy if Lewis Model is carefully applied. A b) The second assumption was that 'labor is unlimited in supply'. This is a contentious assumption but nonetheless is essential to this model. Unlimited supply of labor in such countries is the key assumption, which can play the most important role in the success or failure of this approach. A c) The third assumption is that increased income in urban areas leads to greater savings and investment.

These three key assumptions should be kept in view when studying and analyzing this model as they are seen as the most important factors influencing development in any less developed country. Explain the importance of the "unlimited supply of labor" to the model. As we mentioned above, unlimited supply of labor is crucial to this approach, therefore we must now discuss its significance in greater detail.

Lewis assumes the dual economic system prevails in LDCs and since the majority of their population lives in rural areas, it is obvious that a large portion of their workforce is engaged in the agricultural sector. But though higher percentage of workforce is involved in agriculture, there are not enough employment opportunities for everyone in this sector. Therefore surplus labor is not gainfully employed which means that even though most people are engaged in agriculture, many of them are not needed.

This is because in LDCs, agricultural sector is still in its primitive stages and most farmers are unfamiliar with modern economic ideas or strategies. Lack of knowledge regarding concepts such as marginal productivity or law of diminishing returns results in widespread hidden unemployment. Lewis makes it clear that labor is considered 'unlimited' when it exceeds demand. Secondly, it exists in over-populated countries where higher percentage of the population is concentrated in rural areas.

Lewis assumes, "The supply of labor is therefore "unlimited" so long as the supply of labor at this price exceeds the demand.

In this situation, new industries can be created, or old industries expanded without, limit at the existing wage; or, to put it more exactly, shortage of labor is no limit to the creation of new sources of employment." Describe the development goal and process envisaged by the model Lewisian Model is fairly simple and is fundamentally based on the assumption of dual economy where labor is unlimited in supply. But it is important to find out how exactly this approach can help less developed countries achieve their development-related goals.

We have already covered most of the basic concepts underlying this approach. Now we need to see how these concepts can assist LDCs in their goals. Lewis maintains that when surplus labor is available in a LDC, it must be appropriate utilized to increase production and generate more income. However this can only be done when there are enough job opportunities available to absorb every single person who is able and willing to work.

But since agricultural sector has not developed properly in traditional societies, the responsibility of additional job creation rests with the industrial sector. Industrial sector works in capitalist environment and is fully aware of modern western economic concepts. It creates jobs for unskilled rural labor and employs them at reasonable wages.

Lewis writes, "Earnings in the subsistence sector set a floor to wages in the capitalist sector, but in practice wages have to be higher than this, and there is usually a gap of 30% or more between capitalist wages and subsistence earnings." Lewis feels that with higher wages, the living standard of rural population would rises which would lead to greater demand for various commodities. Increase in demand would force businessmen to increase supply for which they will have to raise their level of production.

For higher production however, they would require more labor, which they can attract from rural areas and this would trigger the development process. Lewis also argues that with increased wages, rural population is likely to save and invest more which increase supply of money in the market. Greater supply of money leads to higher investment and thus more production. This cycle would pave way for more development in LDCs.

State how the currently observable high urbanization rate (in LDCs) and its consequences can be incorporated and interpreted in the model Rapid urbanization is a causing numerous problems for third world urban cities. But according to Lewis urbanization should be encouraged as it leads to more development. However this has not proved to be the case in many less developed urban centers such as Bombay in India or Karachi in Pakistan.

Such urban centers are not well prepared to deal with rapid urbanization, which is becoming a burden on city's limited.